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U.S. Fed official says important to begin tapering talk amid strong recovery

May 27, 2021

Washington (US),May 27: A key U.S. Federal Reserve official said Wednesday that it is important for the central bank to begin discussing tapering its asset purchase program at upcoming policy meetings if the U.S. economy continues to recovery strongly from the pandemic.
"With the service sector reopening while other household and business spending remains strong, I expect rapid growth to continue for some time before slowing to a still robust pace next year," Fed Vice Chair for Supervision Randal Quarles said at a virtual event held by the Brookings Institution.
"If my expectations about economic growth, employment and inflation over the coming months are borne out ... it will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings," Quarles said, referring to the Federal Open Market Committee, the Fed's policy-making body.
"In particular, we may need additional public communications about the conditions that constitute substantial further progress since December toward our broad and inclusive definition of maximum employment," he said.
The Fed has pledged to keep its benchmark interest rates unchanged at the record-low level of near zero, while continuing its asset purchase program at least at the current pace of 120 billion U.S. dollars per month until the economic recovery makes "substantial further progress."
Quarles believed that the rises in actual inflation and expectations since December will prove sufficient to satisfy the standard for inflation in the Fed's guidance around asset purchases later this year, but improvement in the labor market has been slower than he would have liked.
"For instance, the unemployment rate has decreased only 0.6 percentage points to 6.1 percent, and the labor force participation rate is still nearly the same as it was at the time of the December meeting," he said.
Quarles also said that a significant portion of the recent boost to inflation will be "transitory", expecting inflation to begin subsiding at some point over the next several months.
"If our assessment is correct that inflation is temporary, it would be unwise for us to take actions that might slow the recovery prematurely by trying to stay ahead of inflation, when our best estimate is that we are not far behind," he said.
"If we're wrong, we know how to bring inflation down," said the Fed official, noting the risks to inflation over the medium term are "weighted to the upside" due to the emergence of bottlenecks in some supply chains.
"Supply bottlenecks are more prevalent now, especially in the auto and housing industries, with shortages of inputs leading to slower production that reduces employment growth," he said.
"If these shortages persist into 2022, people may adjust their expectations higher for future inflation, which could make above-target inflation more persistent than we currently expect," Quarles said.
However, "I don't want to overstate my concern -- I am not worried about a return to the 1970s," when the United States underwent a period of double-digit inflation, he added.
Quarles's remarks came after Fed Vice Chair Richard Clarida said on Tuesday that the central bank could begin discussing tapering its asset purchase program at upcoming meetings.
"We need to acknowledge there's a risk case on both sides, and I would expect as the data comes in throughout the rest of the year, we will at a point, as a committee, be able to assess that and communicate what that means for meeting our substantial progress test," Clarida said in an interview with Yahoo! Finance.
Robert Kaplan, president of the Federal Reserve Bank of Dallas, also believed that it is time to start thinking about scaling back the central bank's asset purchases.
"I've been saying pretty consistently for the last few weeks (that) as it becomes clear that we are weathering this pandemic, that it would be wise to begin talking sooner rather than later about adjusting our purchases," Kaplan told FOX Business last week.
"These purchases were put in place last year (and) were very appropriate then, but as we are transitioning out, I am concerned about excesses and imbalances in the economy, in risk-taking, certainly in the housing market," Kaplan said, adding the Fed should begin discussing the efficacy of these purchases versus some side effects and unintended consequences.
Source: Xinhua